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No other hocus pocus performed by economists baffles growers more than
opportunity costs. When estimating costs, economists figure total cash and non-
cash costs just like accountants. They also calculate net nursery income following
standard accounting procedures. Subtracting cash and non-cash costs from total
revenue leaves net nursery income. ,.

Opportunity cost to a resource ks the amount of income acrificed by using
that resource in one production procLfj .Sthb A:ia the 'next best use" for
that resource. Every time a resour ie-'i activity, potential
income that could have been realized by using that res UL in other activities
is foregone, sacrificed, or lost. The amount of income foregone becomes the
opportunity cost for that resource.

Examples

Let's say you have $100,000. You can invest your money in: (A) nursery
facilities and growing plants. (B) the bank and get 7% interest; or (C) your
mattress and sleep on it.

Table 1 shows the cost and return allocation used to calculate return to
capital for your nursery.

Your $25,000 net nursery income must be allocated as returns to unpaid labor,
equity capital, and nursery management. First, subtract a $10,000 opportunity
cost for unpaid labor and management. This was calculated by assuming that your
2000 hours of unpaid labor could have earned $5/hour in alternative employment.
Your management is valued at zero. Capital "gets what is left over" after all
other resources have been paid. In this case $15,000.

Table 2 shows returns and opportunity costs for the alternative investments
of your $100,000. If you invest in the nursery, what is the opportunity cost on
your capital? Answer $7,000, the income you could have earned in your next best
alternative, the bank. If you 'invest" in either the bank or the mattress, what
is your opportunity cost? Answer in both cases $15,000, the income you could
have earned in your next best alternative, the nursery.

You could choose alternative methods to allocate net nursery income, depending
on which resource you wanted to 'get what was left over.' Table 3 shows one such
alternative method.

$ 25,000 Net Nursery Income or return to unpaid operator's labor,
management, and capital.
7,000 Opportunity cost on capital (return you could have earned
in bank).
10,000 Opportunity cost on labor (return you could have earned
in other employment).
$ 8,000 Return to management.

Typically economists allocate net nursery income based on opportunity cost to
capital first, opportunity cost to labor second, with management getting what is
left over. Management gets what is left over because return to management in
alternative uses is most difficult to evaluate.

If opportunity costs are subtracted from gross returns to reward different
resources, why can't you deduct them for tax purposes? The question involves
ownership of income generating assets. You own your labor, capital and management.
If you deducted their returns from the nursery business income, these nursery
deductions would be treated as personal income from other sources when you paid
your taxes. You would still be paying taxes on income generated by assets you own.

Using opportunity costs--as confusing as they seem--allows an answer to tough
questions like what is your management worth? Or, what is your capital making?
Finding this out may be the spur that makes you ask if your other inputs are
earning their opportunity costs. Seen thus, opportunity costs are an important
diagnostic tool used by alert managers.